Dollar rises vs. European currencies

Forex market contemplates Madrid probe, interest rates

RachelKoning

CHICAGO (CBS.MW) - The U.S. dollar rebounded sharply against the European currencies on Friday as weak eurozone economic data raised speculation the region's interest rate could be cut.

Selling of dollars for lower-risk currencies such as the Swiss franc, which investors did aggressively after Thursday's bombings in Spain, subsided by Friday.

"The dollar is looking reasonably robust," said Steve Barrow, chief currency strategist at Bear Stearns. He attributed the dollar's gains to some profit taking on the European currencies.

Weaker-than-expected economic data from France looks to have also bolstered the dollar. Continued weak growth data are lifting prospects that the European Central Bank will cut eurozone interest rates, making the euro a less-attractive currency.

French industrial production fell 0.5 percent in January, surprising economists who expected a gain.

The data added to doubts expressed Thursday by ECB member Ernst Welteke that the risks of an economic deterioration are greater than the risk of an economic improvement. See Europe Markets.

Analysts have said that the euro's fall below $1.23 after it hit an all-time high of $1.29 last month has left investors wary of the shared currency's upside potential. Hedge funds and other investors who previously held large bullish euro positions have pulled some money out of the market, said analysts.

In late-day U.S. trading, the dollar was up 1.1 percent against the euro, with the euro fetching $1.2216.

The dollar was mostly steady against the Japanese yen Friday, recently changing hands at 110.83 yen per dollar, or a gain of 0.1 percent from late New York trading on Thursday.

The dollar's broad gains were also the result of investors lightening up bullish positions in the so-called "high-yielding" currencies, such as the Australian and New Zealand dollars, and the British pound.

The interest-rate differential between these areas and the United States accounted for multiyear highs for the high-yielders against the greenback, but investors have been taking some of that money off the table. The selling kicked in even more aggressively as increased terrorism jitters spark worries that investors will continue to seek out riskier markets, including illiquid currencies.

The U.S. currency rose by as much as 1 percent against the British pound earlier. More recently, the dollar was up 0.5 percent, with sterling at $1.8017.

The Australian dollar fell 0.6 percent, with US$0.7320 buying one Aussie dollar.

Madrid investigation

The dollar regained ground overnight as some doubts began to surface that Islamic terrorists were behind the Madrid bombings, which claimed nearly 200 lives and injured scores more.

Spain has blamed Basque separatists ETA. Spanish Prime Minister Jose Maria Aznar said at a press conference Friday that no theory on the responsibility for the attacks in Madrid has been ruled out by investigators.

"It's hard for the market to know what to think," Barrow said. "I don't think we're necessarily seeing a change of view on al-Qaida (involvement). The market still has a fairly bullish tone for the dollar right now."

The European Central Bank "was already moving towards reducing its interest rate from the current 2 percent, in response to a fall in inflation to below its target ceiling, a setback in the latest business surveys and the loss of competitiveness resulting from the dollar's fall against the euro over the last year," the London-based Centre for European Business Research said.

"The Madrid attacks are likely to increase the pressure on the ECB to act in April and not dally any further," the economic consultancy said.

The dollar dropped Thursday after a letter to a London-based Arabic newspaper claimed al-Qaida was behind the train bombings.

Overnight, the greenback strengthened to the 111 yen level in the afternoon trade amid continued wariness over the currency interventions by the Bank of Japan on behalf of Finance Ministry, said dealers.

Japan has routinely slowed the dollar's descent, by selling the yen, in a move to keep Japanese exports more competitive.

Trade and consumer data

The dollar was supported in part on a report showing the U.S. current account deficit narrowed to $127.54 billion in the fourth quarter, more than expectations. See Economic Report.

The U.S. trade imbalance has been a key driver behind the multiyear lows for the dollar hit earlier this year.

Separately, U.S. consumer sentiment eroded slightly in early March, according to media reports of research at the University of Michigan.

The consumer sentiment index fell to 94.1 in March from 94.4 in February. The drop was slightly below expectations that sentiment would remain at 94.4. The current conditions index rose to 105.7 from 103.6 in February. The expectations index fell to 86.6 from 88.5 in February.

Consumers have been expressing worry about weak job growth in recent months, feeding expectations for continued low U.S. interest rates.

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